Family offices divided on Bitcoin’s place on risk spectrum

Family offices are allocating money to Bitcoin from two opposing ends of the risk-return spectrum, according to the founder of a fund dedicated to the digital currency.

The Bitcoin Investment Trust, launched in September last year, currently has net assets of $53.9 million (€39.5 million) with around 150 investors, and New York-based founder Barry Silbert says family offices are one of three main groups invested in the private fund.

The others are tech entrepreneurs and Wall Street executives.

Silbert says: “The fact family offices are investing is not a surprise to me, because family offices have very long term investment horizons, they tend to be fairly well diversified, they tend to like investing in alternative assets."

Silbert says that interestingly family offices fall into two distinct groups when it comes to what part of their investment portfolio they’re allocating to Bitcoin from.

He says there is one type of family office investor taking money out of gold and placing it in Bitcoin, while the other type is younger families who are treating it like a high tech start-up.

“The interesting thing about these two allocations is that they’re really on opposite ends of the risk-return spectrum,” Silbert says. “Bitcoin has a lot of the attributes of gold, in that there’s a finite supply, that’s kind of built into the technology, and the money supply is going to grow at a known, predictable rate.”

However, he explains that investors coming at it from the tech side believe it could have the upside potential of Google or Facebook.

Bitcoin is both a digital currency and a global transaction network. It can either be bought with traditional currencies, or “mined” by those with the appropriate technological know-how.

In the five years since January 2009, when it was founded, the exchange rate for Bitcoin rose from just under one dollar to $871. However, it can be prone to price fluctuations, and on Monday it had plunged to $572 when one of the world’s biggest Bitcoin exchanges, Japan’s Mt Gox, suspended withdrawals due to a software flaw.

Toby Birch, a financial forecaster and family office adviser based in the UK, says Bitcoin should be treated like gold in a family office portfolio, but says the services surrounding the currency could be an area for family offices to invest in tech start ups.

He says one area that’s lacking in Bitcoin at the moment is a credible way of storing it: “If you think of it like gold, from a prospecting point of view, the people who made a lot of money and took the least risk were the people who were actually supplying services – the picks and pan handles effect.”

Birch, who plans to launch a scheme this year where Bitcoin and gold can be exchanged directly, says he has not yet seen a lot of family offices showing interest in Bitcoin, but says he would recommend they do have exposure to the currency. “A lot of old-time gold guys don’t particularly like it, although they might like gold,” Birch explains. “They might see it as a form of Fiat currency because there’s nothing really tangible about it, it’s a tenuous concept to get.”

Ronnie Armist, chairman of London-based multi family office Stonehage Investment Partners, says Bitcoin does not fit with their investment strategy of capital preservation and risk management.

“While Bitcoin has been a ‘get rich quick’ scheme for many investors, it is volatile and unregulated and displays a risk-return profile we would not consider suitable for our clients,” Armist says.

Back in the US, Silbert says the genesis of the idea for the Bitcoin Investment Trust fund was to provide sophisticated investors with a vehicle to invest in the currency.

Silbert says it also provides a secure way to store Bitcoin. “Compared with gold bullion and gold coins, Bitcoin takes a little bit more technological savvy to secure. Those family offices don’t necessarily want to worry what is the best way to secure their digital assets,” Silbert says.

The Winklevoss twins, best known for their lawsuit claiming they were behind the idea for Facebook, also have ambitions of becoming Bitcoin moguls. They are planning to launch a publicly-traded fund once they have approval from the Securities and Exchange Commission.